As expected, the Bank of England (BoE) opted to keep interest rates steady at 4.25%, a two-year low, amid growing concerns that escalating tensions between Israel and Iran could push oil prices—and UK inflation—even higher.
On Thursday, six out of nine members of the monetary policy committee voted to maintain rates, while three favored cuts. The central bank had lowered rates in May, marking the fourth reduction following aggressive tightening during 2022-2023. Market expectations suggest further cuts in the months ahead.
UK inflation, a key factor in the BoE’s decisions, was reported at 3.4% on Wednesday, well above the bank’s 2% target. However, inflation eased slightly from April’s 3.5%.
The bank’s consensus is that inflation will remain elevated in the near term before easing next year. Still, rising oil prices linked to the Israel-Iran conflict threaten to reverse that trend, since energy costs affect production and transport expenses across the economy.
“The risk to energy prices has clearly intensified and moved up the agenda given developments in the Middle East,” Sandra Horsfield, economist at Investec, told AP.
Adding to the uncertainty are potential tariff increases by US President Donald Trump, which could further raise global prices.
“We are still awaiting the full impact of Donald Trump’s tariffs to show up in the prices of goods. We are approaching the end of the 90-day pause on reciprocal tariffs, and what happens from there is really anyone’s guess,” said Lindsay James, investment strategist at Quilter.
James also noted that even with a US-UK trade deal, tariffs on other countries may still affect UK prices, particularly if Europe—the UK’s largest trading partner—fails to reach an agreement.
Alongside inflation concerns, the BoE is mindful that the UK economy’s growth remains sluggish. In April, output declined by 0.3%, impacted by falling US exports and increased business costs, including higher taxes.
“The expectation is the UK economy will stagnate again in the second half, making the need for rate cuts more prominent,” James added. “But with risks on the global stage not only uncertain but also substantial, the mantra of rates being ‘higher for longer’ will continue.”
